I write about the Supreme Court, the intersection between the legal and business worlds, and occasionally about politics. I graduated from the University of Michigan Business and Law schools and the Columbia University Graduate School of Journalism. I started my career at Hughes Hubbard & Reed, a corporate law firm. After switching to journalism, I covered the corporate scandals at WorldCom and Adelphia, Eliot Spitzer, the SEC, and the Supreme Court as a reporter for the New York Law Journal. I have also written for American Lawyer Magazine and Legal Affairs Magazine, and authored Children of Armenia: A Forgotten Genocide and the Century-Long Struggle for Justice (Simon & Schuster). Feel free to subscribe to me on Facebook or follow me on Twitter: @mbobelian.

Hedge Funds, Beware Of Using Your Phones, They Might Be Tapped

Many of the industry’s data-driven strategies (often executed in lighting speed by software programs) involved rapid and repetitive trading patterns in which a hedge fund went in and out of a stock multiple times in a year. The government had no way of figuring out which trades were legitimate and which ones arose from potential insider trading.

A hedge fund’s ability to justify its trades also posed a challenge for the government, explained Jonathan Streeter, the lead prosecutor in the Rajaratnam trial, at a conference hosted by the NYU Stern School of Business in March. A retail investor who had never invested in a company, for instance, often found it difficult to justify why she suddenly purchased a large number of shares in a company about to release positive news.

A hedge fund, though, could produce a report justifying any investment decision, even if insider information and not the analysis provided in a report represented the underlying reason for a trade, explained Streeter, who has since moved on to the law firm of Dechert.

Numerous trades in a stock also made it difficult for investigators to isolate illegal trades from legitimate ones, making it nearly impossible to build the type of circumstantial case prosecutors had deployed for many years.

Under these circumstances, without some direct evidence of the exchange of insider information, law enforcement officials had a daunting hill to climb to bring an insider trading case against a hedge fund.

Galleon proves to be a successful test case

All of this came to a head during the government’s examination of Galleon’s suspicious investments. At first, an exhaustive SEC investigation employing traditional investigatory methods like depositions, reviews of trading records, and subpoenas of phone logs failed to unearth enough evidence of wrongdoing for the case to proceed.

After the U.S. Attorney’s Office in Manhattan took over the case, it obtained wiretaps on Rajaratnam.

The move required a revolution in the DOJ’s thinking: the 1968 law governing federal wiretaps had never been used for securities violations. “The decision to use wiretapping is certainly a radical decision,” said Richard Holwell, the former federal judge who oversaw the Rajaratnam trial, during a recent interview with Bloomberg Law.

Many of the government lawyers assigned to securities and white collar crimes often had experience with the types of cases – involving drugs, organized crime, and smuggling – that fell within the traditional domain of wiretapping. Yet, the application of this crime-fighting tool from one type of crime to another occurred only out of necessity.

Ultimately, the decision to use wiretaps became a game changer. Thousands of hours of incriminating evidence gathered through the wiretaps broke the Galleon case by providing direct evidence of insider information exchanged between Rajaratnam and others.

Just as important, the wiretaps allowed the government to uncover an extensive conspiracy rather than one-off instances of insider trading. Instead of just nabbing Rajaratnam, and perhaps one or two others providing him with illegal tips, the government’s dragnet spread to more than a dozen other individuals.

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The judge in the case will allow jurors to see some information about Gupta’s charitable efforts. Undoubtedly, it has some impact in determining a person’s character, otherwise the lawyers in the case would not have fought over the inclusion.

These are open and shut cases especially wth the transfer of info nowadays so everyone who is high and mighty on this is ridiculous from what I read http://dealbook.nytimes.com/2012/04/19/insider-trading-investigation-ensnares-goldman-sachs-executive/